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CMA Retail Banking Market Investigation: Updated Issues Statement Response from Yorkshire Building Society (“YBS”) Background Yorkshire Building Society (“YBS”) Group welcomes the opportunity to respond to the Updated Issues Statement (the Statement) from the CMA as part of its Retail Banking Market Investigation (the Investigation). YBS is the second largest building society in the UK. It has 230 branches and assets of £37.6 billion and employs approximately 4,600 people and has 3.3 million customers. Our primary business areas are deposit­taking activities, mortgage sales and administration and mortgage related insurances. We operate via a number of distribution channels including branch, telephone, postal and the internet. In terms of the personal current accounts market, YBS offers personal current account (“PCA”) services through its Norwich and Peterborough Building Society (N&P) brand. This service from N&P has been a longstanding proposition with a base of around 100,000 customers, 86% of which are from within the N&P heartland of East Anglia and Lincolnshire. YBS has a stated intention to expand its current account services across its network and brands for the benefit of its own members as a ‘mutual alternative’ to challenge the dominant providers of the market and to increase diversity. Introduction YBS believes that a competitive and well­functioning PCA market should provide a climate for new entrants and challenger institutions across a variety of business models – including consumer owned mutuals. YBS is concerned that very few mutuals are actively participating within the PCA market, and considers that the participation of more mutuals would provide a very different set of choices for consumers and stimulate, amongst other things, localised competition. YBS believes that this would represent a significant step in providing a diverse, dynamic and innovative banking market in the best interest of consumers and go beyond the simple entry of more banks Although YBS does not participate in the small and medium sized enterprise (“SME”) market it believes that the same principles apply, and that the mutual sector ought to be well placed, if not better placed to provide banking services and lending to SMEs within its community and that consumer appetite might be high for such an offering. YBS notes that it responded to previous stages of the Investigation, including the Consultation issued in July 2014 and the Statement of Issues issued in November 2014. YBS is pleased to offer this further submission to the CMA after having also called publicly for reform when publishing our Annual Results earlier this year. YBS supports the CMA’s continued focus on both the PCA and SME markets. As with its previous submission to the Investigation, YBS has focused its concerns on the PCA market, given this is a market YBS wishes to expand our reach within in the immediate future. YBS agrees with the characterisation of the market set out in the Updated Issues Statement and also agrees with the CMA’s approach and analysis concerning the features of the supply of retail banking services which might give rise to an ‘adverse effect on competition’. YBS welcomes and agrees with the three groups of hypotheses, or ‘theories of harm’, which the CMA has identified in the previous stages of the Investigation. On the subject of mutuality, YBS feels that there is not yet enough focus in the investigation in relation to why there are only a small number of building society participants, and what the specific impediments to mutuals might be; For instance, the lack of ability to raise capital as easily as banks can, which prevents a level playing field in the PCA market. In a market with such poor levels of consumer engagement, to reduce barriers sufficiently to enable many more national and local mutual alternatives would produce a more genuinely diverse and competitive environment. If the only outcome of this review was to enable more banks to enter the market, with the dominance of shareholder over stakeholder owned institutions being further perpetuated, an opportunity would be missed to help enable full, free and fair competition and improved outcomes for consumers. Theory of harm 1: Impediments to customers’ ability to effectively shop around With regards to the ‘Theory of Harm 1’, YBS agrees with the CMA’s assertion that there are significant impediments to customers’ ability to shop around and switch their PCA and also that there are weak incentives for banks to compete for customers on the basis of price, quality and innovation. YBS agrees with the CMA’s current thinking that low switching rates may not be consistent with a well­functioning market and that more engaged customers would be expected to drive better competitive outcomes. 2 ACCESS “Can a customer get hold of information about the costs and features of their bank account” YBS has concern with the lack of transparency in charging structures – particularly with regard to unplanned overdrafts. Many of the dominant providers use overdraft fees and charges – which are not readily transparent or understandable, and which are not a key factor in the decision making process for customers selecting a current account provider – as a key source of revenue and use this revenue to effectively cross­subsidise other products and services in the market. The observations, made in particular at 63(b) in the statement, are ones YBS would agree are particularly important. Some of these fees and charges are significant and there is a risk they could represent poor value for customers. They are potentially also incurred by those customers who are least able to afford them, this being particularly the case for unplanned overdrafts which we believe still represents a significant proportion of some PCA providers income from the product which they then use to offset loss­leading acquisition pricing. In some cases, the costs of overdraft fees are greater than interest charged by payday lenders. Potential remedies could include mandating that overdraft pricing must be based on interest only and not fees which would avoid a small number of customers providing the greater proportion of the revenue for providers. An alternative would be to force banks to show a very visible APR for planned and unplanned overdraft lending (to include fees) which currently they do not do. ASSESS “Can a customer then compare it to similar data for other banks and building societies, allowing them to draw conclusions” YBS is aware of some of the work in play which will improve consumer ability to compare and contrast bank account features, prices and service levels. YBS considers this to be an essential “eye opener” for consumers and as such continues to observe that at this stage more still needs to be done in this area, particularly (as discussed at point 63 (c)) that consumers should have the ability to compare different levels of service experience as well as price and features. YBS believes that there are markedly different levels of price and servicing capability across the industry and that this will be a key area for competition in the future. Consumers are simply unaware of the better alternatives available. ACT “Can a customer act on the information” Account switching has only grown modestly since the launch of the Current Account Switching Service (CASS) in 2013, and a proportion of the uplift that was evident in the early days is likely to 3 be due to customers switching between Lloyds and TSB as a result of the sort­code based approach of the TSB separation which led to a number of customers being separated from their local branch. It is cited at point 74 of the statement that the CMA has identified that only 2% of customers switched through CASS in 2014. CASS was proposed and implemented after the plc banks which dominate the current account market made the case it would give a more efficient and predictable switching process. However, there remain outstanding problems, such as that the forwarding of payments only lasts for a limited period and even though this has now been extended, after this time they will still be bounced. A significant number of customers, 35% in research recently published by the Financial Conduct Authority, said they would be more likely to switch if they could have a fully portable account number. YBS welcomes the CMA also acknowledging this issue in the statement. YBS believes much more consideration should be given to the inability of the customer to take account history with them as they move account. At the most basic level people lose the information itself, especially if their entire financial history is on paperless statements (because a sizeable quantity of data is only available through the online banking platform of the bank they wish to leave). YBS is pleased to see the CMA also accept the evidence that this issue is important. Lower levels of overdraft switching and fewer older switchers is clear. In addition, the level of the inertia resulting from fear of losing account history and deteriorating credit score are all factors which need further research. For example, YBS believes those with large overdrafts are not switching, due to concerns that their present overdraft facility might not be matched by the new bank (a valid concern) which, effectively, “locks them in” to their existing poor value deals with existing providers. Even additional measures to improve transparency and comparability (which YBS believes are essential) will not address this particular issue if consumers are not physically able to replicate their existing arrangements elsewhere. YBS believes that the inability to replicate core existing features such as overdraft limits, together with the loss of historical account data may be an even more significant barrier than the issues which would be resolved through full portability of the account number.

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